One should learn from one`s mistakes, but Americans apparently do not. The great crisis of 2008 was brought on by the securitization of sub-prime housing mortgages. To a lesser degree the same mistake was made again with the securitization of sub-prime auto loans, and now the housing market is once more preparing the basis for another crisis. The April sales figures for housing were down 5.4% YoY due to price increases.
Thanks to extremely low mortgage rates there was a rush to buy up until March. At the same time prices went higher due to the demand. Price discovery was thus fostered by the distorted working of the law of supply and demand with mortgage interest rates at 4% against a more “normal” US rate of 6% or a bit higher, possibly 7%. Since most workers earning minimum wages can hardly afford to buy a house anyway even at low prices, they were closed out of the market when prices rose. The middle class earners who could afford to finance higher-priced housing did so and thus brought about even higher prices until the cost of financing up-market housing went beyond the means of most middle-class people aspiring to own their own home, which is supposed to be part of the American dream. Americans are slowly coming to realize that reality is divorced from dreams.
So the net result is that housing sales have diminished in number, and that means that an economy that depends on the consumption of consumer goods for up to 70% of its activity is headed for a recession or worse. The impending Fed rate increase, expected for mid-June, the high level of credit card debt and the catastrophe of sub-prime auto loans defaulting en masse all presage hard times for construction companies building houses. The new homes will be too expensive for the great majority of the population.
The root of the problem is excessively low interest rates that have produced a new equilibrium in the housing market. Lowering interest rates stimulated demand for housing, which in turn resulted in higher prices that became too high for many people. In this way asset price inflation has also come to the housing market although this came about by a route different from that of the stock market.
This is one problem plaguing the American economy. What it all means though is that Main Street is seeing the American dream fade away, enveloped by a storm cloud of debt and the fog of MSM (Main Stream Media) cheering on the Wall Street shysters while the BLS claims that unemployment is at 4.5%. Do not believe it.
This Newsletter has been prepared by WWS Swiss Financial Consulting SA (the company). Even though every effort has been taken to ensure the accuracy of the content of the Newsletter, there is absolutely no guarantee that the information contained in it is correct, up-to-date, accurate or otherwise applicable. It is not intended as a solicitation, invitation or recommendation for the purchase or sale of any investment fund or product or security or financial instrument or to participate in any particular trading strategy or banking product in any jurisdiction. It is not to be distributed in any country or area where it is legally prohibited. No liability whatsoever is or will be assumed by the company for any damage, loss or negative result of any sort ensuing from following views expressed and contained in the Newsletter. Investors themselves assume the full risk for any decisions that they take (caveat emptor). The Newsletter may not be reproduced or published by anyone anywhere in any way or form without the express written permission of the company.
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